I am a software entrepreneur who is currently an investor and board member in three startup companies. I have a B.S. in mechanical engineering. I was born in 1948. This chapter of my life is about trying to help people make their dreams come true. I started writing about economics because I hate the way that our dysfunctional economy is crushing the dreams of so many people. Young people are delaying getting married and having children because of unstable jobs and incomes. It doesn't have to be this way, and I want to contribute to solving the problem. I believe that prosperity is possible.

General Motors Is Headed For Bankruptcy -- Again

President Obama is proud of his bailout of General Motors. That’s good, because, if he wins a second term, he is probably going to have to bail GM out again. The company is once again losing market share, and it seems unable to develop products that are truly competitive in the U.S. market.

Right now, the federal government owns 500,000,000 shares of GM, or about 26% of the company. It would need to get about $53.00/share for these to break even on the bailout, but the stock closed at only $20.21/share on Tuesday. This left the government holding $10.1 billion worth of stock, and sitting on an unrealized loss of $16.4 billion.

Right now, the government’s GM stock is worth about 39% less than it was on November 17, 2010, when the company went public at $33.00/share. However, during the intervening time, the Dow Jones Industrial Average has risen by almost 20%, so GM shares have lost 49% of their value relative to the Dow.

It’s doubtful that the Obama administration would attempt to sell off the government’s massive position in GM while the stock price is falling. It would be too embarrassing politically. Accordingly, if GM shares continue to decline, it is likely that Obama would ride the stock down to zero.

GM is unlikely to hit the wall before the election, but, given current trends, the company could easily do so again before the end of a second Obama term.

In the 1960s, GM averaged a 48.3% share of the U.S. car and truck market. For the first 7 months of 2012, their market share was 18.0%, down from 20.0% for the same period in 2011. With a loss of market share comes a loss of relative cost-competitiveness. There is only so much market share that GM can lose before it would no longer have the resources to attempt to recover.

To help understand why GM keeps losing market share, let’s look at the saga of the Chevy Malibu.

The Malibu is GM’s entry in the automobile market’s “D-Segment”. The D-Segment comprises mid-size, popularly priced, family sedans, like the Toyota Camry and the Honda Accord. The D-Segment accounted for 14.7% of the total U.S. vehicle market in 2011, and 21.3% during the first 7 months of 2012.

Because the D-Segment is the highest volume single vehicle class in the U.S., and the U.S. is GM’s home market, it is difficult to imagine how GM could survive long term unless it can profitably develop, manufacture, and market a vehicle that can hold its own in the D-Segment. This is true not only because of the revenue potential of the D-Segment, but also because of what an also-ran Malibu would say about GM’s ability to execute at this time in its history.

GM is in the process of introducing a totally redesigned 2013 Chevy Malibu. It will compete in the D-Segment with, among others, the following: the Ford Fusion (totally redesigned for 2013); the Honda Accord (totally redesigned for 2013); the Hyundai Sonata (totally redesigned for 2011); the Nissan Altima (totally redesigned for 2013); the Toyota Camry (refreshed for 2013); and the Volkswagen Passat (totally redesigned for 2012).

Automobile technology is progressing so fast that the best vehicle in a given segment is usually just the newest design in that segment. Accordingly, if a car company comes out with a new, completely redesigned vehicle, it had better be superior to the older models being offered by its competitors. If it is not, the company will spend the next five years (the usual time between major redesigns in this segment) losing market share and/or offering costly “incentives” to “move the metal”.

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well said, chrysler only started turning a profit last year, and others must understand, at the same time chrysler went through BK it was sold, of course it would have a different way of going about it.

The Volt has been a financial disaster for GM and for taxpayers. I don’t think selling less than 20,000 cars in two years is anything to brag about, nor will GM ever recoup its investment at this rate. The US taxpayers also get stuck with paying $7,500 towards every car purchased in the form of a federal tax credit. With a sticker price north of $40,000, the car is expensive even after the tax credit. Add to that the car gets 25-50 miles on a battery charge and you have an ugly car that carry’s around a 400lb battery for little benefit. I won’t get into the fire hazards here, but the car is junk…

The Seventies were destined to be abysmal. CAFE ratings, new crash test standards, pollution controls, switching to unleaded fuels, then 2 oil embargoes. It was a perfect storm for Detroit. How do you downsize, decrease weight, increase fuel economy, maintain decent performance, while detuning everything. Low carbon steel? More plastics that were destroyed by UV rays? More technologies that were unproven? As the world’s largest Corporation, GM had a duty to lead the way, and it did with the very successful downsizing of its full sized Chevrolet in 1977 – that was a significant gamble for GM at the time. Chrysler stepped up with their lean burn system. More electronics. How to do all of this without alienating the core buyers, like my dad? He would never have been caught dead in a small car, let alone a Japanese one. Japan Inc crept in the back door, utilizing Ford and GM expertise by selling cheap franchises to wealthy Ford and GM franchisees, then letting the domestic dealers invest billions of dollars in real estate and technical know-how, which Japan Inc got for free. A ’76 Civic had the technical advancement of a ride on lawnmower, but the were dirt cheap, cute, even a little fun to drive, and there was nothing to break on them. They had no a/c, no radio, no power antenna, no automatic transmission – nada. Pretty clever, eh? Then train an entire new generation of customers that they MUST return the vehicle to the dealer every 3 months, whereupon the dealer quietly rebuilds the car one part at a time, without the customer knowing. (There was no internet or blog sites trumpeting recalls from the rafters.) In fact, most of the first generation Datsun 210s, 510s, Toyota Corollas and Tercels and Honda Civics just quietly rusted away, except in California where they quickly became the darlings of the college and tree-hugger set. What’s that? Americans will forgive Japan Pearl Harbor, but not Detroit the ’80s…….

I am really happy for Ford – I truly am, but lost in all the fuss over ‘Government Motors,’ is the fact that in 2006, Ford was nearly insolvent and Mulally had to hock the family jewels: the assets, including trademarks were put up as collateral. GM was in pretty decent shape in 2006. However, as 2008 unfolded, GM’s horde of cash was being rapidly depleted and it’s not that GM was necessarily a poor investment in 2008, it’s that the banks themselves were, for all intents and purposes, insolvent. People forget that it was Bush’s people who did the legwork for the bank bailouts, and then went looking for collateral damage in the way of any industries or businesses that were highly dependent on borrowed money for their business model. Obama did not have a lot of leeway. Time will tell, but if the American media and public turns on Detroit in some sort of obscene punishment…. well, that is just pathetic and may you get everything you wish for.

Except that if the media begins to pile on with this story, just like 2008, it will gain its own momentum and become a self-fulfilling prophecy.

To survive in Canada, GMAC had to become a bank, but banks cannot lease under Canadian law. Poof! There went 43% of my portfolio. Then with the rumors of bankruptcy getting louder and louder, customers started staying away. Even when a client who had a 10 year old Sunfire with 150,000 miles on it and no problems drove the Malibu, then the Accord and Camry, he agreed the Malibu was the better vehicle and scheduled a time to come back and sign the paperwork. He never showed. When I contacted him, he sheepishly admitted that he had gone with the Accord, even though it was more money and not as good a car, because he was worried about getting parts for his new car if GM did go under. That was when I knew I had to get out of the car business. Media piling on hastened GM’s demise; in fact, 35 years of constant snipping and harping took its toll. I have an entire drawer full of clippings from papers where GM passes wind and its on the front page, but Toyota’s rotting Tacoma frames end up in the business section page 8.

Many auto parts manufacturers were in shaky condition in 2008 as the money markets dried up. Auto parts is a very capital intensive business! GM, Ford and Chysler’s parts suppliers are very incestuous. Even Toyota shares parts: when the Cobalt began experiencing electric steering issues back in ’08, lo and behold – Toyota began having them, too: the electric power steering motor came from the same manufacturer. If the entire auto parts industry had collapsed, leaving only the Japanese manufacturers standing, heavily subsidized by the homeland (ask Jim Press how much money Toyota got for the Synergy Drive), theA America you live in today would be a very different place. In 20 years, it would have been unrecognizable.

“The US taxpayers also get stuck with paying $7,500 towards every car purchased in the form of a federal tax credit.”

Plus, electric car drivers use the roads for free and hybrid drivers pay reduced rates for road usage (lost revenue for road maintenance and construction) while those who use gas pay massive amounts of tax per gallon used. The costs go somewhere, they don’t just go away. The burden is passed on to gasoline consumers and taxpayers who are on the hook for the growing balance left uncovered as a result of more fuel-efficient cars and modified consumer behavior.

It’s not my intention to advocate one choice or the other. I really favor anything that uses any resource more efficiently – I don’t like waste that can be avoided. I merely want to point out that revenues in the form or gasoline tax are decreasing for a variety of reasons while our infrastructure needs remain high and costly) and seem to be increasing. There’s only one source to tap for the deficit and that is taxpayers – current and future, mostly future (with interest added – another waste). How many generations future will we squander before something stops us? We’ve lost our capacity for self-control individually and collectively. Individuals have shown signs of learning and turning but not the government. If individuals could “charge” into infinity, they wouldn’t change their behavior and endure legitimate pains either.

An aside: We’re paying way too much for our infrastructure construction projects. Common sense and a lifetime of observation tell me that anytime you have an abundance of demand and a shortage of supply (construction companies, materials, and labor) the prices that are charged skyrocket. Also quality declines in the race for contracts and dollar and meeting deadlines. As a personal observation, the layers of asphalt I have seen laid in recent years is much thinner than in past years and a lot of the work seems more cosmetic than structural.